Spain, Ireland follow different paths on real estate recovery

Madrid/Dublin: At the height of their respective real estate booms, construction accounted for more than 20 per cent of the economies of both Spain and Ireland.

In Spain, the figure is now about 14 per cent. In Ireland, the figure is just 5 per cent. Both booms were fuelled by incentives.

In Ireland, the government gave investors tax breaks to build in certain areas, and granted homeowners breaks on their interest payments.

In Spain, there were incentives for municipalities to approve land for development because they could keep 10 per cent of all the land they reclassified.

The towns would get revenue from the developments and they could use the land they acquired as collateral for loans.

Drunk on revenue

About 230,000, or about two-thirds, of Irish construction jobs have gone since 2007. Home building will hit an all-time low this year, with just one house per 1,000 people being built, compared with 15 in the 2000s, according to the Society of Chartered Surveyors Ireland.

"It was a mania," said Tom Parlon, the former Irish government minister who now heads the Construction Industry Federation. "You could say the government was drunk on the revenue that was coming from all the construction taxes."

In other respects, too, the Irish are moving to deal with the overhang of vacant properties.

On Dublin's north quays lies a half-completed, eight-storey skeleton of an office block. Anglo Irish Bank had planned to use the tower as its headquarters before the company's collapse helped push Ireland toward the international bailout the country agreed in 2010.

It was constructed by Liam Carroll, one of the country's biggest developers, who has seen many of his assets seized by banks.

The skeleton office block is "becoming a landscape photo for Ireland internationally," Brendan McDonagh, National Asset Management Agency's (Nama) CEO, told lawmakers on October 26.

"Everybody who comes to Dublin to see us wants to see the Anglo Irish Bank building; they ask the taxis to bring them around," he said.

"It is a landscape eyesore and it needs to be dealt with." Ireland's central bank has agreed to pay about €8 million (Dh38 million) for the office block, and will make the tower its headquarters, removing the most visible wound of the crash. In all, about 15 per cent of Irish homes were vacant in 2011, the country's statistics office. About 20 per cent of office space in Dublin is vacant.

In places like Sandyford, Nama is behind the rental of about 1,000 properties, as it seeks to make it more attractive to sell towers of apartments to investors. The agency is also enticing buyers for homes by effectively insuring against price declines.

Nama is finishing a plan to ask individual buyers for 80 per cent of the purchase price at the time of the transaction and only collect the remaining 20 per cent if the market value remained the same or increased by a certain amount.

If the value fell, the purchaser would have to pay only part of the outstanding amount or, in some cases, nothing at all.

"The banking system is in a lot better shape than it was two years ago but there is a road still to be travelled," McDonagh said in an interview.

Madrid won't seek European bailout for lenders

Madrid/Dublin : Spain shunned proposals to create a bad bank like NAMA to acquire toxic real estate assets, with Economy Minister Luis de Guindos saying this week the nation won't seek a European bailout for its lenders.

Weapon of mass destruction

Instead, authorities pushed banks to pay for the clean-up by absorbing weaker lenders. Spanish banks hold about 329,000 foreclosed homes, helping to prevent steep price declines, and provide 100 per cent financing on easy terms such as interest-only payments for up to three years, for buyers who agree to buy the banks' properties.

"Banks are employing financing like a weapon of mass destruction to sell their stock and keep prices artificially high by using high loan-to-value mortgages," said Mikel Echavarren, chairman of Irea, a corporate finance company that specialises in the real estate industry.

"Today in Spain it's easier to buy a €200,000 flat from a bank with 100 per cent financing than buy a €150,000 from an individual homeowner where you have to have a 20 per cent deposit."